CASE QUESTION 1 (75 points)

You have received an offer to develop a 150,000 square foot office facility for Sierra Nevada in Chico. The brewery

intends to develop the property as a back office and training facility. Youve been working with the brewer and they

have countered with their final, non-negotiable offer.

They would lease the facility for 6 years, at a triple net annual rent of $2,250,000. The rent would remain constant over the term of the lease. Sierra Nevada would also have the option to renew their lease for an additional 6 years for

$3,000,000 (triple net). In addition, they would have the option to purchase the property at any time during their lease (including the renewal period if exercised) for the price of $29 million. They insist that the property be completed by 11 months from today. Failure to achieve this completion date would relieve them from agreement.

You estimate that the project will cost $25 million (all costs included), and will take 9.5 months from today to complete. You feel that due to the presence of Sierra Nevada as a tenant, you will be able to secure a $20 million loan during the next 3 months, at a 6% interest rate for 3 years with no amortization. You have $2 million in cash available to start the project immediately, and believe that during the next 2 months you will be able to access the remaining $3 million of required equity either by refinancing equity out of other projects you own, selling other properties you own, or bringing in a 3rd party as an equity partner. If you provide the entire $5 million of anticipated equity requirements, it will represent 75% of your net worth. You anticipate that you would receive a $1 million development fee upon successful completion (included in the $25 million total cost).

Your research indicates that currently market rents are roughly $16 per square foot, triple net, and that development is occurring at a rate roughly commensurate to employment growth. Vacancy rates are roughly 5% in the market and are expected to remain stable. Cap rates for comparable property sales range from 8%-10%.

It is time to decide. What do you?